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tv   Options Action  CNBC  March 13, 2010 6:00am-6:30am EST

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next on "options action," one of the biggest events for tech, cisco's q4 earnings. our traders help put the odds in your favor on "options action." on cnbc next. it is a frigid friday night in times square, but the action is just heating up right here. this is "options action" at the nasdaq market site, the world's third largest options exchange. i'm melissa lee. these are the traders. we're in the midst of something
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fierce as the tech market wraps up the worst month in a year. goldman going to $200 by july. we'll tell you why one options trader thinks so. plus is ge about to bust out? a lot of traders are nervous about the $4 level. a big overriding level where people who own the stock and they want to create yield and they sell calls against it, so this four strike was a big strike and we saw a lot of buying and selling. >> that's definitely true, when they see a lot of overhang, they start sell something calls. but if we take a look at the action that we saw in citigroup, volume built on volume. suddenly a lot of different options participants playing in
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this thing. people sitting there trying to cover their short calls. >> you would think there would an lot more put buying. they expect the government to start selling stakes. >> i think part of the thing is it's a $4 stock, so are you going buy a $2 put? there's not a whole lot of there to protect. but i got to write that down, dan says the government was savvy. today was march 12th. the vix was actually higher on the week even though we generally had pretty good news.
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so people buy something options. >> scott makes a good point that citi was the poster child. the rally in financials bottomed out a little bit. last week we saw some of the higher quality names make that good bounce off of lows. and what happened this week sf all the garbage settled in. >> citi represents 20% of the big board volume. in the options side, it represented 13.5% of all of the single side. that's what the whole market story is about. >> pick your analogy. some financial nameses are doing really well. but goldman sachs will do well in almost any environment. other ones are not doing particularly well even hoe we have a nice little bump this week. i'm not certain i really put a lot of faith in that.
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>> a lot of activity in some of the smaller banks, too. but this is a name that has shown signs of a breakout here, a kras in which one might want to actually lock this profits. >> in doubt about it. the stock has rallied about 15% off the recent lows. and it's up a lot in a very short period of time. again we say this about apple all the time. we will never tell you to sell your stock in goldman sachs. the bill that could come next week, this is something that it will rattle people who own goldman sachs. it tends to be v s to be vola earnings. one of the thingses that we suggest is a stock replacement strategy.
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so, for instance, in april, if you're long and maybe you want to sell some of your stock or you want to lemt your risk in your economic k3 possess sure to goldman sachs, you could replace your long stock holding with a wall spread. one of the they think thefrngi at today, you're buying one april 180 call and paying $4 for that. and against that, selling one april 190 call for $1.20. is h how do you make money? you need the stock to rally to at least 182/80. not a whole electric of a lot. you're limiting your risk, but giving something up. >> before we get the take of the
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other trader, let's play our favorite game here and that is stocks versus options. owning 100 shares of gold man risks nearly $18,000. but dan's july 180/190 call spread, that only risks 280. what do you think? stocks wins out. >> it does, but that's not my favorite game. but i think it this makes a lot of sense. you don't have to rush out and sell your goldman. this wall spread makes sense instead of going out and buying it. and goldman is a great name and no matter what happens to goldman, they're likely to do well. the interesting thing is the call spread is a pretty good relationship. >> i think this is a good trade
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for the name. this is a way to put protective strategies on. >> and the last point is that we talk about stock replacement. you don't always have to sell all your stock. maybe sell some out and if you think there's an opportunity that it could continue to rally, maybe you define your risk for the balance of that position with the call spread. >> let's move on to your next option here. it is the best performing stock in the dow this year. boeing shares taking off on hopes of a global recovery, but the technicals are telling a different story. carter worth is here. so it looks like they've taken off, but what are you seeing in terms of the ability? >> stock up 30% year to date. the second and third close he is competitors up 12. that would be home depot and bank of america. at this point, we're looking for the following.
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surges off the march low with the market from 30 to 00, 57% move. pulls back the trend line. boubs bounces again. this team sort of 40 to 55. this time 50 and thousand 70. whatever good news is out there in the coming week, it's discounted.nthousand 70. whatever good news is out there in the coming week, it's discounted.othousand 70. whatever good news is out there in the coming week, it's discounted.wthousand 70. whatever good news is out there in the coming week, it's discounted.housand 70. whatever good news is out there in the coming week, it's discounted.usand 70. whatever good news is out there in the coming week, it's discounted.d 70. whatever good news is out there in the coming week, it's discounted.70. whatever good news is out there in the coming week, it's discounted. 70. whatever good news is out there in the coming week, it's discounted. so we're thinking 63 or there abouts. >> let's bottom line this. so it could pull back. if you don't want to sell the share, mike has the pperfect strategy. it is called the cashless collar. let's layout the strategy. what are you looking at? >> you would think it should be
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cashless, but we're trying to do this for as little money as possible, but don't be afraid to spend a little bit of money. if you end up with a better trade, don't be afraid to spend a little bit of money. >> as sort of a core later on the cost issue, i'll quickly allude to the fact that part of it when it's cash sls how much down side protection do you get for how much up side do you have. the other critical thing with strikes is you're looking at where the protection will kick in and where you're comfortable having your long stock called away from you. >> in terms of time frame? >> you have to know what the catalysts are out there. when you're doing a collar, do you it against a stock that you want to own. so you really protect it. you're not look to ing to get cd away. so you have to look at the catalyst that you think could make it volatile to the down side. >> let's get to the actual
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trade. >> carter said about $63 down side. what i'm looking at is the april 62.5/75, so i'm going to buy the april, but pay about 45 cents for that and sell the 75 call against it. also collecting about 45 creent net/net. one critical point, if the stock does fall down to the trend line that he defined, this will be in your favor. so could you potentially buy that call back and you'll still own that protection. so you did want to make sure that and you are managing the trade strategically. >> in terms of how it makes money, you have to take a look at the upside and according to carter's chart, it may say paul back, but where are you capping that? in i'll be capped out the stock will be called away at $75. that's up about 8%, so 8% in a
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month isn't too bad. >> that is a great return, but you're putting the structure on to protect what you already made. so you almost want to pay a little more, get that closer to the money protection. >> i'm not always a huge fan of collar, but this makes sense. use it protectively. because generally you don't get protection on the down side as you do surrender the appreciation to the up side. >> got to take a break. how does this sound, get paid $100 to possibly make 1700 with a vaenlg that's no riskier than buying a sock. too. >> to be true? well, dan did it with apple. he'll show you how after the break. time for pump up the volume.
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>> specifically as far as emulex, they signed a deal with ibm to use their server technology. the standard thinking is that a takeover is next, so this week on thursday, we saw a ton of call volume in the march and april 15 strike calls. a bunch of volume there. so people trying to buy some really cheap march calls in the
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eventuality that there's a take over. >> this is the kind of options trading we've been seeing, though. not necessarily the really intelligent takeover talk that we try to take a look for. buying near data calls, another name where we saw this actually today was super value, the grocery chain. basically traded 40 times its average options volume today. it doesn't make a whole lot of sense. you see the market stretch. you wonder about the valuations and debt to capital. and you begin to understand why people would be using options to speculate on the last leg if the speculation turns out to be true. >> there is so much options activity specifically driven by deal chatter. with your the were there any rumors out there? >> they had annen so unsoliciter to buy them a year ago.
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but they obviously have assets that people are interested in and you can see a bidding war happening. >> we saw quite a bit of volume in the regional banks about big banks taking over some of the little ones. >> one of the reasons that you can see call buying there is if there's an fdic bank seized, they sell the assets, that's another reason you sometimes see people buying the upside calls. >> and a note of housekeeping, they had no comment on this unusual activity. want to move on now because it's time for the upside call where we tell you how to manage a winning options trade. apple hits new all-time highs, and anyone who followed dan's option strategy is ecstatic. here's why. on options action, we have one cardinal rule. risk less, try to make more, so you can increase your odds of success.
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and that's exactly what dan did with apple. dan out apple's shares were going higher on the release of a new iphone. >> there will be a lot of hype and a lot of speculation and that usually you causcauses thi to go higher. >> so it bought it for $16.60. dan -- >> that's a lot. >> no kidding. how in order to make money, dan needs apple sock to rise by more than the cost of that call. so how can we do this for less? >> sell one july 230 call against it for $ how can we? >> sell one july 230 call against it for $7.than the cost. so how can we do this for less? >> sell one july 230 call against it for $7. >> dan sold for seven bucks cutting his costs down and ka creating what's known as a call spread. he's also capped his profit. that's back limited to the difference between the strike of the call that dan bought and the strike of the call that he sold.
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but tan still needs apple stock to rise by more than the cost of that call spread to make money or above 209.60 by july expiration. so he needs to collect more money. but how can he do that. >> i want to sell a july 170 put for $10.60. >> now you're talking our language. so to spend even less on his call spread, dan sold the july 170 strike put and collected $10.60 and made this trade an instant winner. how is that? well, between the money dan spent buying one call and the money he collected selling one put and one call, dan actually took in $1. but it gets even better. because now dan only needs apple to move a little to make help a lot of money. but there's a tradeoff here, too. but selling that put, dan's now
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obligated to buy apple stock should it fall below that put strike price by expiration. no worries, though, because since the time of dan's raid, apple shares have jumped 17%. and now options actions fans are downloading the show at a furious clip and they all want to know the same thing. what will dan do now? okay. these strategies can be vehicleky, but here is why they work. let's do some stocks versus options. had you bought 100 shares of apple, would you have risked $19,000 and made about 3500 bucks. pretty good. but dan's option trade paid him $100 and that package can be sold for about 1700 bucks today. and that is why we risk less to try and make more. but you're only as good as your last trade. so what do you do now? >> that whole hinthing about th blind squirrel finding the nut.
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but this makes it easy. we're not suggesting these for everybody. a lot of people need to own stock, but we try to look to some different ways to get certain economic exposure and this was a good one. if you wanted to buy it, you would get long at 162. so the stock has had a massive move. you have to cover that put, that 170 put, you sld it for $10.60, you'd be crazy to leave that short. and the other thing about the risk reward, that call spread no you is realized two-thirds of the value and you still have about four months or so. the risk reward is not there anymore. you own it for 20 to make 10. >> that's exactly the thing you up to take a look at and obviously the real thing that we're also seeing is that important on every options trade is to have the right directional
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pick on the stock. and he clearly did in this case. i'm not even sure that you shouldn't take this and once you put this thing up, go and roll it up. >> one hinge dan is great at is being really imagine difference about how to roll out of these they thinks. so i'm a little surprised you're saying take it off because there are other ways you could do. you could sell your stock, buy the upside call back and let that put expire. >> that's because i just bought an iphone. am i the last one? >> there was a report that 51,000 ipad were sold in the first two hours, so what do you think happens with the stock? >> i wanted to focus on the new iphone or iphones. the ipad this morning when that apple store owned online, there was five or six people in our office who bought it including me. so it will be a little bit more sxeeting than many i originally thought. the stock could sell off a little bit, but get back in
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there when you have a little pull back. >> got a question, send us an e-mail and we will do our best to answer it during our 101 web extra. go to our web site and that is right after the show. traders at td ameritrade are a demanding bunch. in fact, they want it all. you know, when i place an order, don't just fill it. get me the best available price. a better price means more money in my pocket. that's why td ameritrade's proprietary order routing technology consistently seeks the best available price. i've got quotes, charts, watch lists. just the way i want them. mission control? right here. command center 2.0 lets you customize your trading space. no risk, no reward. but i need to know what the risk is. my secret? backtest... backtest... backtest. strategydesk lets you backtest your trading ideas to help you choose the best ones and it's free. with superior tools like these, traders get what they want.
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time for the final call. >> the vix seems to have found a bottom. if that's the case, i want to start think about buying options and protect gains. >> gold man sacks, look to replace stock positions in what could be a volatile week. >> we seem to have a consensus here, so i wonder if that means we should be selling the option, but i'll have on go with sachs. >> looks like our time has expired. for more, go to our website and of course we'll be here every friday at 5:30 and look for fast action every day next week in "fast money" it is never too late to start learning about options. see you back here on monday.
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